Dear Apple - Part 2: Patent Trolls And Paying Tolls

There has been great permeation in the news lately (I, II) that companies suing for patent infringement are impeding the growth of businesses and are stealing from companies for no reason. These distractions have been branded as "patent trolls" in the media. This is an overly-broad, unjust denouncement regarding the true geniuses of technology who are being abused without any form of compensation. When these geniuses attempt to regain control over their intellectual property they are branded patent trolls. This follow-up article seeks to investigate one such instance to decipher who is stealing from who and to uncover some of the blanketed bias in the patent world.

Follow Up:

My firstDear Apple article resonated well with investors and customers of the company. The article's meaning was to inform investors and customers about Apple's dealings with VirnetX (NYSEMKT:VHC) and what Apple was doing (or not doing) to reach a meaningful conclusion. The information disclosed was meant to inform investors of the margin ramifications and customers of the future ramifications of Apple's management's arrogance. The intention of this article is the same - to inform Apple (NASDAQ:AAPL) investors and customers, just on a different set of topics. For more information on VirnetX, check out my other articles (I, II)on the topic.

The Patent Playing Field:

There are many companies that play ball in the patent field. From the small and successful Marathon Patent Group (MARA) all the way to Facebook (NASDAQ:FB) buying $550 million dollars worth of patents from Microsoft and all the companies in-between such as Vringo (VRNG) buying some of Nokia's patents (NYSE:NOK). Many people brand the smaller companies as N.P.E's or non-practicing entities tying up the court system and causing a problem. Although an interesting report by the U.S. Government Accountability Office puts this into perspective with their new report:

According to GAO, while public discussion focuses on the increasing role of NPEs in patent infringement litigation, NPE lawsuits account for just one-fifth of these cases.

This government report shines some light on the idea that NPE's are taking over the court system. Whether it's ParkerVision's (NASDAQ:PRKR) case against Qualcomm (NASDAQ:QCOM) The idea can even stretch to companies like BlackBerry (NASDAQ:BBRY), a company that has their patent portfolio valued often, since if a patent portfolio is sold the owner will want to assert their ownership. This article will outline an interesting example of a company that gets branded as a patent troll, although is far from it to shed a new light on the slurs getting thrown around.

Patent Trolls: The Blanketed Bias Is Unfounded

The news is out there, that patent trolls are going to strip Apple down and tear it to shreds and that these lawsuits are unnecessary distractions that are impeding Apple's explosively creative business operations. Now here is the fun part, where the other viewpoint of this argument gets interesting. Let's keep in mind of a few items as we delve in:

Apple's technological growth was, in part, due to Apple infringing upon technologies owned by other companies without compensating those rightful owners.

There are plenty of checks and balances in the system that prevents any abuse of the patent system. A company cannot strip Apple down and hold them at ransom, although in some cases, it is Apple who flagrantly abuses.

An Interesting Example:

The recent lawsuits between VirnetX and Apple have brought a very loud and biased stance against VirnetX, calling the company a patent troll. This statement is not only without merit but it hides the true nature and background of the company. I am going to outline some background information on VirnetX to help lift the bias and make for an equal playing ground on the patent discussion.

1. VirnetX obtained their patents from a defense contractor, SAIC, and continues to expand their technology and intellectual property through the genius engineers that work for VirnetX. These inventors, such as Dr. Robert Short and Dr. Victor Larsen, created the secure communications technology that Apple has been found to be infringing upon.

2. Apple owns 15,500 patents, 8,500 of which are U.S. patents. The number of patents awarded to Apple surged 68% in 2012. Although Apple may think so, your enterprise value does not dictate your ability to assert your intellectual property. Apple is a huge patent holder so it cannot have a double standard of protection while they leave others uncompensated. Also, the number of patents and the quality of patents very important as patents must be valued on a per patent basis.

3. Although VirnetX did not get an injunction, their technology is being used by Apple for profit. Apple has created a barrier to entry with FaceTime barring VirnetX from entering the market without prejudice. Let's call Apple a "patent controller" as they have integrated VirnetX's technology into their product which is popular and has saturated the marketplace. This makes it impossible for VirnetX to profit from their up and coming product, an application that encompasses the technology created by VirnetX's engineers. Apple has more money thus it can create and sell devices containing the infringing products on a mega scale. This creates an unbreakable barrier to entry for VHC. This is as if you had an idea, patented it, and find a large company incorporate your technology in their application, leaving you unpaid. Due to the scale of this giant company you cannot profit from selling your version and remedy must be sought elsewhere.

4. At the end of the day, large cap companies like Microsoft and Apple license their patents with each other all the time. This can take place through monetary means, cross-licensing terms or a mix of both. There is no difference if a smaller company ends up having to litigate a larger company for the use of the former's technology. Large companies sue each other all the time for patent and intellectual property infringement (I, II, III). As stated earlier, market capitalization should not dictate a company's ability to assert ownership of intellectual property. As such, smaller companies that own the technology that larger companies infringe upon should not be branded as patent trolls, as the infringement does not depend on the market capitalization of the company.

5. Political power is undoubtedly influencing the world of intellectual property. President Obama vetoed Samsung's win against Apple. Further, All Things Dreported that the administration stated in their decision that:

"The Administration is committed to promotinginnovation and economic progress, including providing adequate and effective protection and enforcement of intellectual property rights," the letter said.

Now this is interesting - Apple cheered this ruling. Apple is afforded protection of its intellectual property rights yet VirnetX is branded a patent troll? Apple cannot have a double standard in this area. Apple is afforded effective protection and enforcement of their intellectual property rights, meaning its patents andtechnology encompassed within their patents. Where does this meaning get lost in translation? VirnetX is afforded the same rights under the law that protects Apple's technologies. VirnetX is simply asserting its rights.

Apple's response to the administration's decision reported by All Things D was:

"We applaud the Administration for standing up for innovation in this landmark case…"

It is interesting to note that Apple is standing up for innovationin this light but not others. Amazing innovation has been used by Apple in part to create and include amazing applications in their devices. Now let's go back to the technology in question. It is VirnetX's technology that was created by its own engineers who innovated. These engineers first worked at SAIC, a government defense contractor, to innovate and create many of the foundational technology disclosed by the patents VirnetX has asserted against Apple. These same engineers continue to innovate at VirnetX to expand the technologies they created. Following in the words of the Obama Administration and Apple…. Let's stand up for innovation, or better yet, stand up for all innovation and assertion of rights without bias.

6. VirnetX is not in the business of buying patents and asserting them to abuse the patent system. VirnetX's engineers, some of the original inventors at SAIC (SAI), created their technology personally. Also as stated earlier, they continue to expand the breadth of their technologic breakthroughs. Apple creates amazing technologies at an amazing rate. Apple also buys patents all the time (I, II,), VirnetX does not. VirnetX does not go out into the market and buy bankrupt companies with patents as Apple has before (I).

There is nothing wrong with buying patents but misplaced bias to call a company a patent troll. VirnetX is seeking remedy for technologies its engineers have created at SAIC. This is far from buying patents simply to assert which, in its own right, is not immoral if the technology is so valuable. Apple itself has a large patent holding block.

7. Shockingly, Apple spends more money on patents than it does on research and design (I). Steve Jobs hated being copied, which led him to patent everything. A former employee of Apple stated in regard to Apple patenting:

"If nothing else, it prevents another company from trying to patent the idea."

"Stung by the huge financial blow though, Apple co-founder Steve Jobs decided to patent everything from that point onwards. The Apple boss held monthly 'invention disclosure sessions', where engineers described what they were working on to lawyers, who would then put in a patent application -- even if they knew it wouldn't fly."

Apple's engineers followed their leader's words with their actions. An Apple engineer at the original trial was set to take the stand to be questioned on an application for a patent that he filed that was nearly identical to the technology disclosed in VirnetX's patents. Apple ended the disposition early and faced penalties for it. This clearly demonstrates that Apple tried to patent technology that was already disclosed in VirnetX's patents, clearly demonstrating that Apple knew the importance of such technologies, thus validating the merit of VirnetX's technology.

Apple is a large buyer of patents. Some people believe that Apple does not assert their patents in a hostile manner. This is a distinct difference from an alleged patent troll. I am slowly getting away from the term as we go. Although let's keep in mind the scenarios that come into play in the patent world with relation to VirnetX and Apple.

Apple: buys their patents and patents their own intellectual property to protect their technologies. Moreover, they do assert their patents if they are infringed upon by other companies, such as against Samsung (OTC:SSNLF).

VirnetX: Some of the original engineers now at VirnetX originally developed unique and specialized technologies at SAIC. Some of the same engineers have expanded their work at VirnetX. VirnetX wants their intellectual property protected with the same protection that Apple is afforded.

Probability is creating a problem. Odds are that large technology companies in general hold most of the worthwhile patents and a large number of patents in general. So when a smaller company that holds innovation comes along it shocks the market.

Perspective is the ultimate key here. Keep in mind that the size and success of a company does not dictate that those who it steals property from are "unwarranted disturbances."

Any cut off of rights of patent holders destroys the innovation and creation. Where is the line drawn? Do smaller companies get blocked from seeking remedy even though large companies get protection because they have more stores, more money or cool commercials?

I think we are all in agreement that size does not matter. But if we accept the mindset that smaller IP owners are patent trolls we may be creating a dual set of standards, one for small companies and one for large. There is no foundational reason to distinguish the rights of patent holders based upon their size, as any such differentiation will always trace back to the same concept of unfair double standards that will result in real abuse of the patent system. It is a sort of discrimination. Since the larger company would have both standards: protection of their IP and the invincibility against everyone else.

171 Cases:

There is no doubt that there are some people or companies that just dig up pointless patents to sue companies seeking a pay day. Although it is impossible to know the scope of any infringement until it is decided upon through litigation. Apple has dealt with 171 IP cases in the past five years. I do not think that number would warrant increased regulation of small patent holders since:

Apple the largest company in the world.

171 lawsuits is a small number when put into perspective that a full trial must ensue. Also these lawsuits decide whether property is or is not being stolen.

One hundred seventy one is a small number considering what is at stake relative to the size of Apple. This number over the five years is a little over 35 lawsuits per year. A police station in New York City would hope that the number of robberies or stolen property complaints stays below thirty-five in a week. The only difference is the size and scope of what's at stake. We do not prevent people from filing a complaint at the police station based upon their net worth so we should not prevent infringement claims based upon a company's size.

Now let's speculate on this 35 number a little further. According to the GAO report, only 1/5 of the intellectual property cases filed are by patent trolls. One-fifth of 35 is seven. But wait, this is over five years, resulting in an estimated one patent trolling lawsuit filed against Apple per year. Dealing with one lawsuit per year is not a problem, and does not justify changes that would affect the property ownership of everyone else. This is speculation on my part, and is only my opinion.

Government Reform

The government has taken many steps in the past two years regarding patents.

There are several reasons why the above do not affect VirnetX, including:

The introduction of the SHIELD act stated that "The SHIELD Act does not affect innovators with legitimate patent infringement claims". VirnetX has settled with NEC, Microsoft (NASDAQ:MSFT), Mitel (NASDAQ:MITL), Siemens (SI), Avaya (AVYA) and Aastra (OTC:AATSF out of court, as these companies saw the value in VirnetX's legitimate technology and settled. A jury found for VirnetX against Apple and the Judge upheld it.

The Revamped SHIELD act targets patent holders to pay for all legal fees of any losing cases. Since VirnetX has legitimate patent and patent infringement claims, they are confidant with any trials.

Recent bills are targets against P.A.Es (patent assertion entities) whose entire business models are to gain a significant amount of their income from IP lawsuits. This does not apply to VirnetX for two main reasons:

The company launched their Gabriel Connection Technology, this June, demonstrating their drive to bring their products to the marketplace.

VirnetX has plans for future business platforms, such as their Secure Domain Name Registry.

A few interesting points to keep in mind can expand upon this viewpoint even further. Startups and small cap companies don't have the resources to bring their ideas from paper to the market as quickly as huge companies like Apple, especially when the former has to litigate the latter for IP infringement. Things rings ever more true when the latter's products, like FaceTime, have saturated the marketplace creating an unbreakable barrier to entry.

Keep In Mind: The Variant View

There are malicious entities that do abuse the patent system, no industry is perfect. Forbes ran a story with an interview of the CEO of Marathon Patent Group, Doug Croxall, which was quite interesting that can touch upon this topic.

A very clear prospective on property rights, the leader of Marathon Patent Group goes on to state:

Mr. Croxall: Big corporations want to pay as little as possible for intellectual property, and fewer NPEs means fewer payments. Understand, a patent is a property right granted by the U.S. government. Many in our industry give voice to smaller inventors who have neither the time, the money, nor more critically the expertise to defend their property rights. An inventor many times doesn't have the knowledge to commercialize certain creations. A patent is property, as is owning a house. Can anybody just come along and steal your home?

The CEO goes on to state on the issue of malicious entities that:

Mr. Croxall: No industry is perfect, and bad actors exist. There are some cases of "secondary parties" getting sued that some consider stretching the envelope.

This is a good point to keep in mind, that there are malicious entities that are abusing the system. Keeping this issue in mind can help create an even playing ground for everyone, big and small.

Conclusion:

The news surrounding patent trolls has made its way over to the dealings between VirnetX and Apple. Although many of the governmental actions are futuristic and face bipartisan scrutiny, they are in the media now. VirnetX's IP disputes with Apple will be likely concluded before any governmental changes even take effect. These changes would not harm VirnetX as it is not a patent troll. Undoubtedly, there are mischievous entities that are looking to beat the system that may need correcting. There is nothing wrong with the loser paying all the legal fees involved to curb malicious IP lawsuits.

I am not attacking Apple, I wrote this article on my Macbook Pro while also using my iPhone 5, I love their products. The example between VirnetX and Apple is to highlight an important point, that the media has cast a definition to a company that is unwarranted. This article was also meant to provide a working example, to inform readers on the other side of this debate, to have a full understanding before casting undue bias. VirnetX is not a troll, they just want Apple to pay a toll for using the bridge they created and utilize without repercussion.

Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Always do your own research and contact a financial professional before executing any trades. The information disclosed is to provide the other side of the patent debate with a compelling example of such. This article is purely informational and is my own opinion.